Expected tax increases have Bay Area wealthy moving with urgency | SF Business Journal

Bay Area wealthy residents and their advisers aren’t waiting for November’s election results, much less waiting for state or federal taxes to actually rise, before taking action to avoid costly levies.

“The strong likelihood of increased taxes at the national level is making people dust off and update their plans,” Michael Yelverton, principal and managing director at Tiedemann Advisors in San Francisco, told me. “In California, the prospect of an income tax hike along with the proposed wealth tax, which is still TBD on whether it’s enforceable, is spurring California residents to think even more earnestly about their current structures and estate plans.”

There are several tax strategies available for preserving wealth, with one of the hottest topics of conversation focused on moving out of California — and fast.

After all, Stripe is asking employees to make the life-changing decision to leave the Bay Area by the end of this month and actually make the move by year-end. In exchange, the fintech is offering its Bay Area employees a $20,000 relocation bonus but up to a 10% cut in base pay.

Stripe’s offer is turning heads. A quick move out of state could save employees a lot in California taxes if they’re residents of other states ahead of a possible IPO next year for the San Francisco company, which was valued at $36 billion in its last funding round. There are a lot of Stripe employees anticipating a big payday in an IPO. Plus, moving staff out of the Bay Area could allow Stripe to shed some of the real estate it plans to use at Kilroy Realty Corp.’s massive Oyster Point project in South San Francisco.

Bay Area accountants say they’re having increasing conversations with their California clients about leaving the Golden State.

“The majority of my conversations lately with my clients are around the rules of domicile and breaking domicile with California,” said Sandy Murray, a partner and private client services co-leader at San Francisco accounting firm BPM. “It used to be a theoretical conversation. Now there’s more urgency.”

The national shift to working from home amid the pandemic has opened the eyes of employers and their workers on the ability to work for Bay Area companies while living outside California.

“Covid has changed things,” Murray said. “People have gone to what used to be their summer homes and spent eight months there and realized they can operate from there. So why pay 13.3%, and possibly 16.8%, in tax to California?”

California Gov. Gavin Newsom’s skepticism about the wisdom of taxing the rich more has done little to quell concerns among the state’s wealthy. "In a global, mobile economy, now is not the time” for such tax increases, he said recently.

But California’s lawmakers may see things differently. In addition to a proposal in the last legislative session raising the top rate on the state's personal income tax to 16.8%, another proposal called for the first-in-the-nation wealth tax. Neither made it to the governor's desk but can be reintroduced.

“Even if the governor vetoed the bill, I could see the overzealous Legislature overriding it,” Sacramento developer Paul Petrovich, who plans to move to Austin, Texas, in two years, told me.

Petrovich and other wealthy Californians are also concerned about the Legislature's track record for making tax increases retroactive. Plus, a new twist in the proposed wealth tax was to tax exiting Californians for 10 years after they leave the state. That has Petrovich suspicious about the governor’s talk against raising taxes on the rich.

“I would not be surprised if this is an attempt to decoy those of us who would be subject to this tax due to the number of people who have already left the state and then create an even more draconian, more prohibitive means to evacuate the state,” said Petrovich, who has built numerous retail and housing projects. “We have gone way past anybody respecting property rights and supporting people that take major financial risks that create jobs and tax revenue.”

In Washington, presidential candidate Joe Biden has said he will raise taxes on those with incomes above $400,000. So accountants and other financial advisers are urging clients to consider locking in gains this year to take advantage of current tax rates.

“We’re advising clients to do the opposite of traditional tax planning. We’re now trying to accelerate income with today’s lower tax rates and defer deductions until next year,” said Gerry Clancy, a partner and national tax practice lead in the privately held business group at East Bay accounting firm Armanino.

That could include taking bonuses this year instead of next year, exercising options now and converting 401(k) and traditional IRA balances into Roth IRAs, paying income taxes now on those conversions. Advisers are quick to add that there is no simple strategy that works for everyone.

Expectations that estate-tax exemptions could soon drop dramatically also has accountants working the phones to alert clients.

“The higher estate-tax exemption was set to sunset in 2026, so we had years to think about how we wanted to deal with that. Now we have months, maybe even weeks to deal with it,” Clancy said. “The problem with estate planning is that it takes time to implement plans. You can’t wait till the last minute. You may have to act now, even before the election.”

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